The stock market in October is likely to be a below-average performer.

That's not because it's the month in which the two worst crashes in U.S. stock market history occurred. Though that almost certainly is a statistical fluke, it nevertheless has led to endless paranoia about the month.

Instead, according to a new study, the poor odds for this October trace to it being the first month of the calendar quarter. That's when the market typically moves inversely to its performance in the second month of the prior quarter. The S&P 500 index performed very well in August, gaining 2.6% versus a monthly average of 0.7% over the past century.

The study, which recently began circulating in academic circles, is entitled "Correlation Neglect in Assets Prices." It was conducted by Jessica Wachter, a professor of quantitative finance at the Wharton School of the University of Pennsylvania, and Hongye Guo, a finance professor at the University of Hong Kong. The "neglect" in their study's title refers to investors and researchers being largely ignorant up until now of the correlations-some positive and some inverse-that exist between different months of the earnings reporting cycle. (From 2021 to 2025, Wachter was the chief economist at the Securities and Exchange Commission's Division of Economic and Risk Analysis.)

These correlations key off of what investors learn from earnings reports during the first month of the quarter. That's when many large-cap companies in different industries report their earnings. And because those earnings reflect economic strength in many different sectors, they paint a fairly comprehensive picture of the health of the overall economy. Investors respond accordingly by pushing the market up or down.

One underappreciated consequence, however, is that earnings reported in the second month of the quarter contain very little information that is genuinely new. If earnings are especially good in the first month of a quarter, they usually are good in the second month as well-and vice versa. Because investors are unaware of this correlation, however, they often overreact in that second month-pushing the market even further in the direction it moved in the wake of the first month's reports.

That overreaction then gets corrected in the first month of the subsequent quarter, which is when the next snapshot of economic health gets reported.

In short, the professors found, you should bet that the market's direction in the second month of a quarter will be the same as it was in the immediately prior month, and that it will move in the opposite direction in the first month of the subsequent quarter.

You shouldn't translate that bet into bouncing between 100% long and 100% cash or short positions, however, Wachter told Barron's. That's because there is a significant amount of statistical noise in the market's month-to-month returns. The best way to exploit this is, over many years, to scale your equity exposure up or down each month depending on what their model suggests. Exchange-traded broad-market index funds, whose expense ratios are extremely low, make this easy and cheap to do.

To illustrate, imagine that you have a target equity allocation of 60%. If the S&P 500's return in the first month of a quarter is better than expected, you would increase your allocation in the second month of that quarter-say to 70% or 80%, depending on your risk tolerance. You would increase it to an even higher level if the market's return in that first month is particularly high.

You would then return to your target allocation in the third month of the quarter, when hardly any earnings are reported, and reduce your equity allocation to symmetrically less than 60% in the first month of the subsequent quarter. You would do just the opposite if the S&P 500's return in the first month of a quarter is worse than average.

Wachter and her co-researcher report that, in backtesting, this approach significantly outperformed 19 other well-known and widely followed market-timing strategies. Wachter, of course, cautions that past performance doesn't guarantee future profitability. But it makes sense to pay attention to the largely predictable ways in which the market's monthly returns respond to earnings reports.

Mark Hulbert